* Negotiations suspended since 2004 over trade differences
* Talks to include trade, political dialogue, cooperation
* EU's Barroso seeks to reassure EU farmers
* Venezuela will participate as observer (Recasts with Brazil confirmation, adds comment)
By Bate Felix
BRUSSELS, May 4 (Reuters) - The European Union and the South American trade group Mercosur will relaunch stalled negotiations on a trade liberalization pact, both sides said on Tuesday.
Leaders will formalize the move at an EU-Mercosur summit in two weeks in Madrid, a senior Brazilian government official told Reuters.
Talks to ease trade restrictions and strengthen cooperation between the European Union and the Mercosur group made up of Argentina, Brazil, Paraguay and Uruguay began over a decade ago, but were suspended in 2004 over trade differences.
Last year's global financial crisis has revived interest between the two groups in reviving the negotiations.
Any agreement could meet strong opposition from EU farmers, and face a major hurdle in the European parliament over fears that cheaper agricultural products from Brazil and Argentina would harm the EU farm sector.
EU Commission President Jose Manuel Barroso moved to calm such fears, saying the decision to relaunch the talks would be accompanied by conditions.
"We will address any adverse impact on certain sectors with specific measures, in particular in agriculture," Barroso said in a statement.
The EU's executive said European exporters could benefit from an increase of about 4.5 billion euros ($6 billion) in exports annually, and the deal would give exporters, investors and services providers better access to Mercosur's market.
The EU is Mercosur's largest trading partner, representing 20.7 percent of Mercosur trade. Trade between the blocs stood at 63 billion euros ($84 billion) in 2009. Europe is also the largest investor in the region, with 167.2 billion euros ($222 billion) invested in 2008.
The announcement was welcomed in the Brazilian capital.
"We are very satisfied with the EU decision," said the government official, who asked not to be named.
Since the Doha round of global trade talks ran into a stalemate, Brazil has tried to resume bilateral trade negotiations, with the EU in particular.
But several analysts had expressed caution that internal divisions among Mercosur countries could derail the talks. Brazil has traditionally been more willing to accept deeper industrial tariff reductions than Argentina, for instance.
Venezuela, which has nationalized large parts of its economy and is struggling with inflationary pressure, will participate in the talks as an observer. Pending approval by the Paraguayan parliament, Venezuela would become a full Mercosur member.
With a combined population of about 270 million people and a total GDP of 1,300 billion euros for the region, the EU is seeking full liberalization of a large part of trade in goods, and concessions for all major industrial sectors in return for access to its market.
EU FARMERS WORRIED
"Any deal that liberalizes agricultural trade between Mercosur countries and the EU would have extremely damaging consequences for Europe's farm sector," EU farm union Copa-Cogeca said in a statement.
Imports of beef and poultry from Brazil and Argentina in particular would likely increase significantly under such a deal, Copa-Cogeca said.
"This could have serious implications for beef production in Ireland, France, Scotland and Spain, as well as poultry production in regions of France, Poland and Hungary," said one EU source, who asked not to be named.
Farmers are also worried there could also be repercussions for pig meat production if EU consumers developed a taste for cheap South American beef and chicken, forcing pork prices down too in order to compete.
Likely concessions on biofuel imports to the EU could also see a sharp increase in ethanol exports from Brazil, the world's second largest producer, accounting for 95 percent of total Mercosur ethanol production. (Additional reporting by Charlie Dunmore and Raymond Colitt in Brasilia; Editing by Charles Dick and Peter Cooney)